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2.5 Organisational and structural transformation of the KELER Group
The organisational and structural transformation of KELER Group, the operator of the securities clearing and settlement infrastructure, took place during 2013, in accordance with
the latest European regulations (EMIR). However, full transformation is not yet complete, as compliance with CSDR provisions may require additional organisational reforms. KELER CCP fulfils the capital requirements set forth in the EMIR, which stipulates that risks must be managed by the institution in which they actually arise. Depending on the degree of risks assumed, EMIR specifies capital requirements for the central counterparty, at a minimum of EUR 7.5 million. In order to comply with this provision, the owners of KELER CCP decided on a risk-proportionate recapitalisation in the amount of HUF 4 billion and opted for the phasing out of the callable guarantee model.29 At the end of 2013 KELER CCP held a total of HUF 4.583 billion in available funds.30
In line with EMIR provisions, the risk management model used by KELER CCP has also been reformed.31 Based on the stress tests completed during 2013 in the market subject to the EMIR, guarantee funds would have continued to provide sufficient coverage for any exposure arising, under extreme
yet plausible conditions. The EMIR specifies a stringent stress testing methodology for determining the lines of defence provided by guarantee funds. As a new service, segregation of dedicated securities accounts is now available at the individual client level, as is the transfer of positions and collateral assets between clearing members.32 At KELER CCP, mechanisms for the continuous monitoring of liquidity risk have been established, as has the methodology for back tests, sensitivity analyses and reverse stress tests. Risks inherent to ordinary market fluctuations are managed by KELER CCP through individual clearing member collateral (e.g. initial margin, variation margin), whereas various financial assets (e.g. collective guarantee funds, own resources) are employed to mitigate risks arising from extreme, but plausible market scenarios.
The provisions of EMIR only mitigate the effects of spillover risk between the central counterparty’s services for capital and energy markets, without eliminating the risk completely.
Besides its services for capital markets, since July 2010 KELER CCP has also been in charge of clearing and guaranteeing transactions on the gas and power markets (together ‘energy markets’). As energy markets continue to expand (also across borders) they open up a new market segment for KELER CCP; however, none of these markets can be regarded as risk free. With energy market turnover on the rise and in view of the consequences of the EMFESZ case,33 it has become an oversight requirement to ensure the legal separation of energy market risks from those applicable to the capital market, thereby preventing a possible credit exposure arising on the energy markets from also exhausting guarantee elements available for the capital market. While the EMIR does reduce the probability of spillover risk between services on the capital and energy markets to a notable degree, it does not eliminate it completely. The last guaranteed lines of defence, KELER CCP’s additional guarantee capital – and, until 31 May 2014, KELER’s guarantee callable on first demand – are set at an equal level for both markets. From an oversight standpoint, the separation of central counterparty operations into capital market and energy market functions would represent the only risk-free solution, but that mostly falls into owner competence.
Under the European Market Infrastructure Regulation (EMIR), all central counterparties operating within the European Union – thus including KELER CCP – must have their licenses renewed. On 13 September 2013 KELER CCP submitted its
29 Under the callable guarantee model, KELER, as the majority owner of KELER CCP, uses its own funds to provide financial collateral, to the extent determined by its General Meeting, in case KELER CCP’s own funds were at risk of being depleted due to a credit risk event. 30 Available funds comprise the following elements: minimum required capital (HUF 2.480 billion), dedicated own resources (allocated to guarantee fund markets of KELER CCP, amounting to HUF 564 million), other financial resources (HUF 1.539 billion). 31 This affects the default waterfall, the stress tests used, the margin requirements and the calculations used to determine the guarantee fund. 32 In the event that a clearing member is subject to insolvency or bankruptcy proceedings, those of its clients that have resorted to the service of position transfer may be entitled to having their positions and related collaterals transferred to another clearing member with virtually immediate effect. As a precondition, parties must conclude a relevant agreement in advance, which must be submitted to the central counterparty. 33 See Box 8 in the publication Report on Payment Systems, 2012.
application for authorisation to the competent supervisory authority, which is required to evaluate said application within six months of the application being declared complete. However, decisions are ultimately made not by the regionally competent supervisory authority but a college that is in charge of the authorisation and supervision of central counterparties. Similarly to other central counterparties in Europe, KELER CCP’s Supervisory College has also been established, with the central bank of Hungary, the Financial Services and Markets Authority of Belgium, the central bank of Ireland, the Financial Conduct Authority of the United Kingdom and the European Securities Markets Authority (ESMA) as its members. The re-authorisation procedure of KELER CCP is scheduled to complete in the third quarter of 2014 at the latest.
